The slogan “No taxation without representation” played a key role in the American Revolution. There is great wisdom in this slogan. First of all, it recognizes that taxation is necessary. Benjamin Franklin famously wrote in a 1789 letter to Jean-Baptiste Leroy
Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.
May the Constitution of the United States of America continue to long endure! And may we someday be free of death and taxes. But freedom from death and taxes will not come in my lifetime. Indeed, in his piece
Larry Summers makes a persuasive case that anything like our current expectations for what government should do cannot be funded without substantial government revenue increases in the future. The reason is that one of the largest tasks our government has taken on is helping older Americans. As the ratio of older Americans to younger Americans increases that task becomes more difficult.
Japan and most nations in Europe are already ahead of us in being subject to the heavy burdens governments face from an aging population.
There is one way for America (and the other rich nations) to escape the fiscal difficulties of taking care of an aging population. That escape hatch is dramatically more open immigration, which I urge as a matter of basic ethics in “You Didn’t Build That: America Edition” and “Adam Ozimek: What ‘You Didn’t Build That’ Tells Us About Immigration.’”
But for the rest of this post, I will consider what we need to do in tax policy if American politicians, for whatever reason, stubbornly refuse to live up to the words engraved on the Statue of Liberty. In the better case of dramatically more open immigration, what I say below should still be helpful in the context of lower overall tax rates than if current quite-restrictive immigration policies continue.
The second dimension of wisdom in the slogan
“No taxation without representation”
is the idea that, if taxes are necessary, we should at least demand something in return for our taxes–something beyond the government spending itself. Members of the English parliament used the need of kings for tax revenue to establish this principle of asking for something in return for taxes using the earlier slogan “redress of grievances before supply."
The Speaker of the House of Representatives is the title for its presiding officer, as noted, by paralleling the English institution, where there was a Speaker of the House of Commons. And this name came about for historical reasons: back in the early days, when the law was the king’s commands, the Lords and Commons were convened to (1) approve taxes for the benefit of the realm, e.g., defense, the idea being taxes people had a voice in were less resented than those levied by the king alone, and (2) advise the king on the people’s needs and wants, so that he was informed on conditions throughout the realm. To ensure their concerns got listened to, they adopted a policy of "redress of grievances before supply”, i.e., “deal with our complaints before we vote you any money.” They would draft up bills of grievances outlining what was wrong and suggesting what the king might do about it, which eventually took the form of draft legislation prepared for the king to approve. (This is why a not-yet-passed law is a “bill”) The person who would bring the result of the Commons’ deliberations before the King in formal address was its presiding officer, the person who would speak to HM for it – and hence its Speaker.
In my post “Scott Adams’s Finest Hour: How to Tax the Rich,” I wrote:
…human beings want many things, including many intangibles. It is my belief that we can do much better at harnessing these other desires for the common good than we have.
In particular, if we give people something in return for their taxes that increases with the amount of taxes they pay, then their motivation to avoid taxes will not be as strong. Scott Adams himself wrote in “How to Tax the Rich” about
…how the rich can feel good while the rest of society is rifling through their pockets.
I can think of five benefits that the country could offer to the rich in return for higher taxes: time, gratitude, incentives, shared pain and power.
To encapsulate the idea that–especially if current policy is being altered–the government should give people something in return for their taxes other than just the government spending, let me propose two slogans with the same basic meaning. The formal version is
No tax increase without recompense.
The colloquial version is
No tax hike without something to like!
I hasten to say that–especially when leaving aside the benefits of the government spending itself–it would be overoptimistic to hope that the “something to like” will be enough to make those being taxed more heavily actually feel better off. The aim is to lessen the sting and lessen the motivation to avoid the tax.
It might seem utopian to think that these twin slogans could carry any weight in the political sphere. But the Republican Party–stiffened in its resolve by the amazingly effective Grover Norquist–has come surprisingly close in the last few years to enforcing a rule of no tax increases at all at the Federal level. So I do not think it unreasonable to hope to enforce a rule of “No tax increase without recompense.” On the other side, to those who think that Grover Norquist’s rule of no tax increases at all is too powerful to disobey, let me say that budget constraints are powerful things.
Holding things together in anything like the way to which we are accustomed is likely to be impossible without substantial revenue increases in the future. And any substantial need for revenue increases will hit close to home: there are not enough superrich; so a tax hike that makes a big difference on the revenue front is likely to hit the many who are moderately rich–such as economists, doctors and lawyers–not just the few who are very rich. Therefore, as a matter of self-interest, as well as out of public-spiritedness, I believe it is of great importance to come up with good proposals for tax hikes with something to like. Combining a tax increase with some kind of recompense is crucial both to avoid any hint of class warfare that could fray the social fabric and to keep tax distortions as small as possible. Here, I will make a specific proposal that is so ready to hand that many others have suggested something similar. But the details matter, and I will present my own version.
Even many economists who otherwise want to simplify the tax code have recognized the special status of the charitable deduction. Greg Mankiw wrote in the New York Times:
THERE are certain tax expenditures that I like. My personal favorite is the deduction for charitable giving. It encourages philanthropy and, thus, private rather than governmental solutions to society’s problems.
The substantive merit of the tax deduction for charitable contributions is also an important point in Matt Yglesias’s post “Tax Reform is Hard and It’s Not Just Politics.” In my proposal, I want to steer a course between partially balancing out a tax increase by expanding the current tax deduction for charitable contributions and partially balancing out a tax increase by following the proposal Tom Grey gives in his comment to “Scott Adams’s Finest Hour: How to Tax the Rich”:
How about 100% tax credits for …
donating directly to a Federal Gov'tProgram.
Thus, the rich who wantmore Social Security, donate their taxes to that cause. Or those who want more defense.
I’m pretty sure the rich would donate more taxes if they could choose where their money goes (despite the obvious ease of gov’t budget-makers just reducing the amount of other gov’t spend ).
Heck, such 100% tax credits could, and should, be available for all real taxpayers (not legal fiction corporations).
A key inspiration for my proposal is a trio of tax credits in Michigan State tax law, the public contribution credit, community foundation credit and homeless shelter/food bank credit. Although these credits are severely limited in size, up to that limit they mean that, together with the benefits of the Federal deduction, a taxpayer can get back over 70% of his or her contribution. But the set of organizations eligible for these three Michigan state tax credits is much narrower than the set of organizations eligible for the Federal tax deduction for charitable contributions. My interpretation of the intent of the law is that these three tax credits are meant to encourage people to give in ways that reduce the amount of direct government spending needed by the State of Michigan. For my proposal, let me define a “public contribution” as follows:
A public contribution is a donation to a nonprofit organization meeting high quality standards that engages in activities that (a) could be legitimate, high-priority activities of Federal or State governments and (b) can to an important extent substitute for spending these governments would otherwise be likely to do.
My proposal is to raise marginal tax rates above about $75,000 per person–or $150,000 per couple–by 10% (a dime on every extra dollar), but offer a 100% tax credit for public contributions up to the entire amount of the tax surcharge.
The reason I am not proposing a simple expansion of the current charitable deduction is that I want to make sure that the program helps ease government budget problems in a big way. (Note that, in addition to substituting to an important extent for government spending, these public contributions would crowd out some fraction of regular charitable deductions and increase government revenue in that way.) On the other side, though Tom Grey’s proposal of choosing which government program to support is great for a portion of existing taxes (as I think he intended it) I don’t think it goes far enough for a tax increase.
Now let me paint the picture of the kinds of effects I think this program of public contributions (the tax surcharge plus 100% public contribution credit up to the amount of the tax surcharge) would have:
- Many creative people, with more money to work with, would think of brilliant new ways to help the poor, as well as continuing and expanding tried-and-true ways of helping the poor.
- Scientific and medical research would be much better funded than currently.
- Foreign aid going to ordinary people, not dictators, would dramatically increase.
- It would be possible to fund better and cheaper ways to take care of older Americans in their own homes and delay any need for them to go into nursing homes.
- Needs that the government is slow in meeting could be addressed more quickly.
The substitute-for-government-spending test in the proposed law is not meant to prevent the total amount of public contributions for some things from going above what the government would do under the current system. Its purpose is simply to make it possible for the government to cut back on some types of spending to an important degree. Although religious congregations would not be directly eligible for public contributions because of the legitimate-activity-of-government test, many already have associated nonprofit organizations that could be eligible. And a large fraction of religious donations are from people who earn less than $75,000 per year. Support of arts enjoyed mainly by the rich, such as opera, might not meet the high-priority test, although the fine arts would still be eligible for the usual deduction for charitable donations. Setting the public contribution goal at 10% of annual income above $75,000 per person should be enough to ensure that nonprofit activities eligible for the public contribution credit are much better funded despite any crowding out or relabeling of existing contributions. There would probably be some reduction in funding for activities not considered important enough to qualify as public contributions–which would occasion much debate about exactly where to set the boundary between “public contributions” and regular charitable contributions–but setting priorities is not a bad thing.
On the part of the relatively high-income taxpayers who are subject to the combination of tax surcharge and 100% public contribution credit, many would look at the unchanged amount they actually pay the government in the end, after the tax credit, and not think of it as a net tax increase at all. Being required to devote 10% of income above $75,000 per person to public contributions would take some getting used to, but after a while, I think many people would have fun with it. Parents could teach their kids about their social responsibilities by discussing as a family where to devote the family’s public contributions. People might become involved in volunteer work in the same organizations to which they had directed their public contributions. There is joy in giving, and by providing a choice of which organization to give to, my hope is that the joy of giving would be only partially muted by the requirement of giving to some appropriate organization.
James Madison wrote in the Federalist # 51:
If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.
Since we are not angels, most of us need very strong encouragement to give as much to public causes as the health of our Republic requires. Since those who govern us are not angels, it is best that many of the details be left to each of us to decide individually. To the extent possible, let’s have the government specialize in those important tasks that for one reason or another are not as emotionally rewarding for individuals to donate to and let individuals make decisions about those tasks that are.
People love freedom. Tax increases cannot help harming freedom to some extent. On the cost side, a program of public contributions like the one outlined above comes close to minimizing the harm to freedom from a tax increase. And the benefit side is substantial. In addition to the benefits of steering far away from national bankruptcy, it is hard for me not to think it would be a better world, with greater soft power than ever for the United States of America, if we adopted a program of public contributions like the one I have outlined.
For more on this idea, see "How and Why to Expand the Nonprofit Sector as a Partial Alternative to Government: A Reader’s Guide"